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Journal of Family Business Strategy: Tensie Steijvers, Mervi Niskanen
Journal of Family Business Strategy: Tensie Steijvers, Mervi Niskanen
KIZOK Research Center, Hasselt University, Agoralaan Building D, 3590 Diepenbeek, Belgium
University of Eastern Finland, School of Business, Kuopio, Finland
A R T I C L E I N F O
A B S T R A C T
Article history:
Received 8 March 2013
Received in revised form 16 April 2014
Accepted 9 June 2014
This article investigates, from an agency perspective, whether private family rms, compared to private
nonfamily rms, are more tax aggressive. Moreover, for private family rms, the effect of the extent of
separation between ownership and management on tax aggressiveness is studied. Additionally, we
verify whether effective board monitoring moderates this relationship. Using Finnish survey data, results
show that private family rms are less tax aggressive than nonfamily rms. For the subsample of private
family rms, rms with a lower CEO ownership share are more tax aggressive whereas the presence of an
outside director in their board mitigates this direct effect.
2014 Elsevier Ltd. All rights reserved.
Keywords:
Tax aggressiveness
Family rms
CEO ownership
Board of directors
Introduction
Accounting practices in (private) family rms are rarely studied
(Salvato & Moores, 2010), even though accounting research is one
of the eldest business disciplines and family business represents
the prevalent form of economic organization in the world
(Songini, Gnan, & Malmi, 2013, p. 71). With respect to the
accounting topic of our study, tax aggressiveness, current scant
literature mainly focuses on public family rms and how their use
of tax aggressiveness differs from public nonfamily rms (for
example Chen, Chen, Cheng, & Shevlin, 2010). Whether tax
aggressiveness also prevails within private family rms and
how this tax aggressive behaviour can differ within the heterogeneous group of private family rms remains unstudied.
However, private family rms are characterized by an
entanglement of the family throughout the organization which
affects the nature and extent of agency conicts within the family
rm and is expected to affect the managements tax aggressive
behaviour. Tax aggressiveness is dened as downward management of taxable income through tax planning activities which can
be legal or illegal or may lie in between (Frank, Lynch, & Rego,
2009). Recent evidence shows that management engaging in tax
aggressive activities to minimize tax payment is becoming an
increasingly common feature of the corporate landscape around
the world (Lanis & Richardson, 2011). Desai and Dharmapala
348
So, contrary to low tax alignment countries such as the US, tax
aggressive behaviour becomes visible in the nancial statements of
rms in high tax alignment countries. Consequently, tax aggressive
behaviour has a real impact for rms in high alignment countries:
the rms real economic performance may not become visible in
their nancial reports due to tax aggressive behaviour. This may
make it very difcult for shareholders and other stakeholders to
understand and value the true economic performance of the rm.
Therefore, studying the determinants of tax aggressiveness in the
context of high tax alignment countries is very important.
Our article contributes to the literature in several ways. First,
our study is the only study focusing on tax aggressiveness in a
private family rm context. Prior research generally focuses on
differences in rms tax reporting between private and public rms
(e.g. Beatty & Harris, 1999; Mills & Newberry, 2001) or between
public family rms versus nonfamily rms (for example Chen et al.,
2010). We focus only on private (family) rms because specic
agency problems in private family rms make us eager to believe
that there are different agency problems within the heterogeneous
group of private family rms leading to differences in tax
aggressiveness. Additionally, we take into account the socioemotional wealth perspective which complements the agency
view. Moreover, previous studies only investigate the direct effect
of board monitoring on tax aggressive behaviour (e.g. Lanis &
Richardson, 2011; Minnick & Noga, 2010). In this article, we study
the moderating effect of board monitoring, which can shed a new
light on this stream of literature. Additionally, the existing
literature on tax aggressiveness is dominantly US based (which
is a low tax alignment country) and does not necessarily translate
to other high tax alignment countries such as Finland.
This article proceeds as follows. In the next section, the
theoretical underpinnings are discussed and hypotheses are
derived. In section Data and variables, the dataset and variables
are discussed. Section Results presents our results and section
Discussion and conclusion highlights the major conclusions and
implications.
Literature review and hypotheses development
According to traditional agency theory, the privately, family
owned and managed rms are often considered as a low agency
cost case (Fama & Jensen, 1983; Jensen & Meckling, 1976). Family
members would be more likely to behave altruistically. Parental
altruism is a utility function in which the welfare of parents is
positively linked to the welfare of their children. Altruism may
have several benecial effects such as the creation of a selfreinforcing system of incentives encouraging family members to
be considerate of one another (Schulze, Lubatkin, & Dino, 2003a)
and the enforcement of incentives to communicate and cooperate
with each other (Van den Berghe & Carchon, 2003). When a rm is
owned solely by a single owner-manager, it can even be considered
as a zero agency cost case (Ang, Cole, & Lin, 2000).
However, by (partially) separating ownership from management in private family rms, agency costs may arise due to
information asymmetries and strains on the limits of bounded
rationality among family owners. The interests of owner(s) and
manager(s) may not be completely aligned: the ability of the CEO
to act in his own interests at the expense of (other) family rm
owners will increase (Chua, Chrisman, & Sharma, 2003). Engaging
in tax aggressive behaviour by the CEO may be a reection of this
shareholder-manager agency problem (Hanlon & Heitzman, 2010).
Engaging in tax aggressive activities is accompanied by costs
and benets within the context of private family rms. As Dyreng
et al. (2010) indicate that the CEO plays an economically signicant
role in determining the level of tax avoidance that rms undertake,
we take the perspective of the CEO in studying the costs and
349
350
descendant CEOs, which increases the incentive to act opportunistically because they bear only part of the cost of such an action.
It may enhance rent extraction by the CEO leading to, for example,
increased perquisite consumption and additional remuneration
(Fama & Jensen, 1983). The shareholder-manager agency conict
becomes more prominent.
Moreover, the low CEO ownership share weakens the attachment of the family to the rm. The utility generated by the
preservation of SEW decreases as the rm moves into later
generational stages (Gomez-Mejia et al., 2007). Throughout
generations, the focus shifts from family goals to a combination
of family and business goals (Schulze, Lubatkin, & Dino, 2003b).
Therefore, the rm reputation effect of tax aggressive behaviour
and the incentive to preserve SEW turn to be of minor importance
since the family ties have weakened and the intra family conict
may intensify (Miller & Le Breton-Miller, 2006).
If the CEO has no ownership share and is thus a professional
nonfamily CEO, ownership and management are completely
separated which may lead to signicant shareholder-manager
agency costs due to misalignment of incentives. Goals of manager
(agent) and owner(s) (principal) can diverge because the
nonfamily manager is not always familiar with the family goals
or may choose other goals than those strived for by the family
shareholders (Jensen & Meckling, 1976). He will have a more short
term view compared to a family CEO (Miller & Le Breton-Miller,
2006). He will be more inclined to improve the nancial results for
the family shareholders and engage in tax aggressive activities,
such as setting up group structures abroad. Since family rms are
not eager to provide nonfamily managers with equity shares, they
will be more likely to receive a salary or bonus based on their
performance (Banghoj, Gabrielsen, Petersen, & Plenborg, 2010).
Additionally, he may increase the free cash ow by engaging in tax
aggressive behaviour by making use of depreciation reserves and
adjustments, in order to invest in pet projects or pursue personal
objectives (Jensen, 1986).
As nonfamily CEOs shift a rms orientation towards short term
nancial goals (Classen et al., 2012), we expect them to be less
concerned with penalties from the tax authorities or other long
term implications with regard to rm reputation or SEW. In line
with this reasoning, Gomez-Mejia et al. (2007) and Gersick,
Lansberg, Desjardins, and Dunn (1999) state that nonfamily CEOs
will pursue the SEW objectives less than family CEOs because
personal attachment and self-identication with the rm is less
strong in nonfamily managed rms. Nonfamily CEOs are brought in
to provide objectivity and more rationality (Blumentritt, Keyt, &
Astrachan, 2007). Their relationship with the rm is more distant,
transitory and individualistic (Block, 2011). Therefore, only the
potential personal reputation damage may withhold the nonfamily
CEO from engaging in excessive tax aggressive behaviour. Contrary
to a family CEO who holds a rather secure position in the rm,
nonfamily CEOs can be laid off more easily, making them more
concerned about their personal reputation on the market for
corporate executives (Allen & Panian, 1982; Block, 2010). Based on
all these arguments, we posit:
Hypothesis 2. Private family rms with a high CEO ownership
stake exhibit a lower level of tax aggressive behaviour.
However, the board of directors may in several ways be an
instrument to reduce shareholder-manager agency problems and
restrict tax aggressive behaviour by the CEO. The link between the
board of directors and tax aggressive behaviour is grounded in the
agency view of corporate governance. According to this view, rm
decision-makers may behave opportunistically by pursuing their
own interest (Fama & Jensen, 1983; Jensen & Meckling, 1976).
Therefore, agency theorists point at the instalment of a board of
directors as an instrument to control the rms decision-makers.
351
2
If the family rm is inherited by a family member who becomes CEO of the rm,
(part of) the shares are transferred. However, when a nonfamily CEO is hired, he
generally obtains no ownership share (Michielsen, Voordeckers, Lybaert, &
Steijvers, 2013). Family rms are eager to transfer the rm to the next generations
and to keep control within the family in order to perpetuate the family dynasty.
Therefore, family rms are reluctant to hire nonfamily CEOs because the family
wants to avoid the loss of strategic and operational control and goal conicts
(Gomez-Mejia, Cruz, Berrone, & De Castro, 2011). However, even when hiring a
nonfamily CEO is necessary for the rm, providing him/her with shares is often
considered to be a step further and a step too far in the family losing control of the
rm.
352
Table 1a
Descriptives and Pearson correlation matrix (total sample).
1.
2.
3.
4.
5.
6.
7.
8.
9.
ETR
Family50
Family0
Familyown
Roa
Lev
Ppe
Intang
Size (in 000)
Mean
Std. dev.
0.23
0.57
0.58
0.53
0.20
0.22
0.34
0.03
310
0.14
0.49
0.49
0.47
0.33
0.53
0.35
0.14
2.90
2
1
0.06**
0.06***
0.05**
0.24***
0.10***
0.06**
0.09***
0.08***
3
1
0.97***
0.96***
0.03
0.03
0.10***
0.10***
0.01
1
0.95***
0.03
0.03
0.10***
0.10***
0.03
1
0.02
0.03
0.12***
0.10***
0.01
1
0.09***
0.03
0.04*
0.13***
1
0.35***
0.19***
0.05**
1
0.05**
0.01
1
0.08***
10
1
0.27***
N = 1650.
*
Signicant at the 10 percent level (two-tailed test).
**
Signicant at the 5 percent level (two-tailed test).
***
Signicant at the 1 percent level (two-tailed test).
Table 1b
Descriptives and Pearson correlation matrix (subsample of family rms).
1. ETR
2. Ceoown
3. Size (in 000)
4. Roa
5. Lev
6. Ppe
7. Intang
8. Ceo_dual
9. Ext
10. Board size
Mean
Std. dev.
0.23
0.50
315
0.21
0.22
0.37
0.02
0.53
0.81
2.35
0.14
0.33
3.20
0.21
0.34
0.39
0.04
0.50
0.39
0.97
2
1
0.06*
0.03
0.25***
0.16***
0.13***
0.05*
0.07**
0.02
0.06*
3
1
0.22***
0.06*
0.03
0.03
0.04
0.35***
0.01
0.33***
1
0.17***
0.05
0.03
0.01
0.15***
0.03
0.37***
1
0.22***
0.03
0.01
0.04
0.07**
0.10***
1
0.60***
0.06*
0.03
0.03
0.01
1
0.02
0.06*
0.10***
0.04
1
0.03
0.08**
0.04
1
0.05
0.34***
N = 898.
*
Signicant at the 10 percent level (two-tailed test).
**
Signicant at the 5 percent level (two-tailed test).
***
Signicant at the 1 percent level (two-tailed test).
variables were scaled by lagged total assets.3 For rms with a higher
protability, it can be expected that they tend to have higher
effective tax rates (ETR). Firms with a higher leverage (Lev) will
have more interest costs and thus lower ETR. For plant, property and
equipment (Ppe) and intangible assets (Intang), its depreciations
are tax deductible. So we can expect a positive relation between the
extent of Ppe and Intang and the resulting depreciation on the
one hand and the ETR on the other hand. Lastly, we also control for
rm size by including the natural logarithm of total assets of the
previous year (Size). In addition, for all regressions, we include
dummies to control for year and industry xed effects.
Tables 1a and 1b present the descriptive statistics and Pearson
correlation matrix for the main variables of our analyses for the total
sample of private family and nonfamily rms and for the subsample
of private family rms, respectively. The correlation tables indicate
no problem of multicollinearity. Moreover, we computed the
variance ination factor analysis (VIF) among the variables
indicating how the variance of an estimator is inated by the
presence of multicollinearity (Gujarati, 1995). The highest VIF value
here is 7.55 for the subsample of family rms and 1.73 for total
sample of family and nonfamily rms, which is below the threshold
of 10, so no multicollinearity is present (Manseld & Helms, 1982).
Table 1a shows that more than 50% of the total sample consists
of family rms. Table 1b reveals that the private family rms in our
sample have an average asset size of 315,000 euros and have an
average effective tax rate (ETR) of 23.3 percent. The median ETR for
3
Lagged assets have not been affected by current years decisions. For example,
for ROA, the assets of year t 1 (also beginning assets of the current year t) are used
to create the prots in year t. The lagged assets are also preferred because the
current year assets would include the prots. The same reasoning can be applied to
the other control variables. We also re-estimated the base regression (Table 3,
model (1)) using assets in year t as a denominator but the results remain
qualitatively the same.
(1)
(2)
(3)
**
Family50
0.01 (0.01)
Family0
0.01** (0.06)
Familyown
0.01* (0.01)
Roa
0.11*** (0.03)
0.11*** (0.03)
0.11*** (0.03)
Lev
0.01 (0.01)
0.01 (0.01)
0.01 (0.01)
Ppe
0.03** (0.01)
0.03** (0.01)
0.03** (0.01)
Intang
0.09 (0.08)
0.09 (0.08)
0.09 (0.08)
Size
0.01*** (0.01)
0.01*** (0.01)
0.01*** (0.01)
Constant
0.13*** (0.02)
0.12*** (0.02)
0.13*** (0.02)
R2
0.11
0.11
0.11
Adjusted R2
0.10
0.10
0.10
***
***
F value
8.69
8.58
8.43***
Number of observations 1650
1650
1650
Note: Robust asymptotic standard errors are reported in parentheses.
*
Signicant at the 10 percent level (two-tailed test).
**
Signicant at the 5 percent level (two-tailed test).
***
Signicant at the 1 percent level (two-tailed test).
353
Table 3
Robust OLS regression on family rms tax aggressiveness.
Dep. variable: ETR
Ceoown
Ceoown Size
Ext
Ceoown Ext
Ceo_dual
Ceoown Ceo_dual
Board size
Ceoown Board size
Roa
Lev
Ppe
Intang
Size
Constant
R2
Adjusted R2
Change in R2
F value
Number of obs.
(1)
(2)
(3)
**
0.02 (0.01)
0.15 (0.07)
0.03*** (0.01)
0.13
(4)
***
(0.03)
(5)
0.05* (0.03)
0.01 (0.02)
0.06*** (0.02)
0.13*** (0.03)
0.01 (0.02)
0.01 (0.03)
***
0.17 (0.03)
0.01 (0.04)
0.04 (0.03)
0.16 (0.13)
0.01*** (0.01)
0.15*** (0.03)
0.12
0.10
0.12***
8.48***
898
***
***
0.17 (0.02)
0.01 (0.05)
0.04 (0.03)
0.16 (0.13)
0.01 (0.01)
0.22*** (0.04)
0.13
0.11
0.01***
8.77***
898
0.01 (0.01)
0.02 (0.01)
0.17*** (0.02)
0.01 (0.04)
0.05 (0.03)
0.15 (0.13)
0.01***(0.01)
0.14***(0.04)
0.13
0.10
0.01
7.58***
898
***
0.17 (0.02)
0.01 (0.04)
0.04 (0.03)
0.17 (0.13)
0.01*** (0.01)
0.11*** (0.04)
0.14
0.12
0.02***
8.52***
898
0.17 (0.02)
0.01 (0.04)
0.04 (0.03)
0.15 (0.13)
0.01*** (0.01)
0.15*** (0.04)
0.13
0.10
0.01
8.01***
898
[(Fig._1)TD$IG]
Marginal Effect of 'Ceoown' on tax aggressive behavior
Dependent Variable: ETR
1
4
Several econometrical studies (Berry, DeMeritt, & Esarey, 2010; Brambor, Clark,
& Golder, 2006; Norton, Wang, & Ai 2004) state that the effect of any independent
variable X in an interactive model with a continuous moderator Z, on the dependent
variable Y is not any single constant. The effect depends on the betas of X and of the
interaction term XZ, as well as on the value of Z, the moderating variable. In order to
interpret the results, the calculation of marginal effects is of great importance as it is
perfectly possible that these effects are signicant for relevant values of the
moderating variable, even if the coefcient on the interaction term is insignicant
(Berry et al., 2010; Brambor et al., 2006). More specic, we take into account the
relevant elements of the variance-covariance matrix and recalculate the standard
errors as suggested by Brambor et al. (2006, p. 74).
5
7
size (ln (assets))
11
354
(positive) together. We compare model (2) which is the unconstrained model, with a constrained model where we add a
constraint that Ceoown and the interaction term with size
together do not lead to a signicant effect. Based on the Wald test,
we obtain a signicant F value (F(1, 877) = 4.78; p = 0.03) which
means we can reject the hypothesis that there is no net effect.
Alternatively, we performed an F test, comparing the constrained
with the unconstrained model (F(1, 877) = 4.81; p = 0.03) which
again means we can reject that there is no net effect.
Furthermore, we study in regression (3), (4) and (5) of Table 3
the moderating effect of the board of directors performing
adequately their monitoring role. With respect to Hypothesis 3a
on the presence of outside board members, the variable Ext is
included in regression (3) as well as the interaction term
Ceoown Ext. The interaction term has the predicted negative
sign and is signicant at 1 percent level. The signicant coefcient
of Ceoown equals 0.13, whereas the interaction term has a
coefcient of 0.13. This means that if family rms hire an external
board member, the effect of the ownership share of the CEO
(Ceoown) is reduced to 0. This indicates that the CEO ownership
share no longer affects the tax aggressive behaviour of the rm if
the board includes an independent outside director. The benet for
CEOs to engage in tax aggressive behaviour, at the expense of other
shareholders, is nearly absent when the rm hires an external
board member due to a higher monitoring effectiveness thereby
limiting possible rent extraction behaviour. This conrms Hypothesis 3a.
Regression (4) extends this discussion and takes into account
the moderating effect of CEO duality (CEO_dual). Therefore, we
include in regression (4), Ceo_dual and the interaction term
Ceoown Ceo_dual. Contrary to what we expected, CEO duality
appears to have no signicant moderating effect. It seems that
whether the board is chaired by the CEO or not, it does not
inuence the effect of CEO ownership share on tax aggressive
behaviour. Therefore, we cannot conrm Hypothesis 3b. Finally, in
regression (5), we include the variable Board size as well as the
interaction term Ceoown Boardsize. Again, in line with
regression (2), in order to capture the effect of the CEOs ownership
share when board size changes, we have to take into account the
marginal effect of the CEOs ownership share. These marginal
effects are drawn in Fig. 2.
However, Fig. 2 reveals no signicant moderating effects for any
value of board size. Thus, we cannot conrm hypothesis 3c. In
[(Fig._2)TD$IG]
Marginal Effect of 'Ceoown' on tax aggressive behavior
-.2
4
Board size
355
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